Daily FX Outlook, USD, EUR, GBP and HUF

USD: Yellen testimony provides asymmetric risks into USD favour The key event of the day is Chair Yellen’s semi-annual testimony to the Senate. With the market pricing rather a benign probability of March rate hike (30-35%), risks are asymmetric into USD favour. If the status quo is retained and no hints at higher probability of March rate hike are presented, USD downside should limited. On the other hand, if Yellen chooses to look to nudge expectations up to 50:50 to keep the option of a March hike on the table, the upside to USD should be more pronounced due in part to the less overcrowded USD positioning. See Will Yellen keep March alive? DXY 100.08 support (100-day MA) to hold, while the break of the 101.44 resistance (50-day MA) at risk.

EUR: Limited impact of EZ data on EUR; Yellen a bigger driver Our economists expect Eurozone industrial production to have come down substantially in December, given weak German numbers (due to the cold Christmas weather related issues). While not EUR positive, its effect on the currency should be rather marginal. EUR/USD to be largely driven by the Yellen testimony, which poses downside risks to the cross (towards the 1.0500 level).

GBP: Sterling gains from higher UK CPI to be short-lived UK Jan Inflation looks set to hit 2%YoY today (vs 1.9% consensus) as the effect of sterling’s post-Brexit collapse continues to feed through to prices. This is particularly evident in food and fuel prices, which are being lifted by surging input price inflation. While this may provide short-term support to GBP today (to the extent to which it translates into market expectations of higher probability of BoE rate hike – following the change in the BoE bias from dovish to neutral and the introduction of the two-way risk to policy rates), we would fade any move in EUR/GBP lower / GBP/USD higher as the UK activity data later this week (softer employment report and retail sales) should weigh on GBP.

HUF: High Hungarian CPI to create false hopes for tighter monetary policy Our economists look for a meaningfully above consensus Jan CPI (2.5% YoY vs 2.1%). Not only will base effects from higher oil prices kick in significantly, but the market is likely overestimating the degree to which the recent VAT tax cuts weigh on prices (as pass through is unlikely to be 100% and usually takes three months to feed in). We expect the higher CPI to be HUF positive due to false market hopes that high inflation will cause the NBH to move closer to policy normalisation/tightening. As per yesterday’s NBH’s FX swap tender (ie, an example of an ongoing unconventional easing), we don’t think this will be the case and the NBH will retain a dovish bias in coming months. EUR/HUF to break below 308.00 level today and PLN/HUF to converge towards the 71.00 level.